Health Check: How Prudently Does Stockmann Oyj Abp (HEL:STCBV) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Stockmann Oyj Abp (HEL:STCBV) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Stockmann Oyj Abp

What Is Stockmann Oyj Abp's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Stockmann Oyj Abp had debt of €488.0m, up from €464.8m in one year. However, it does have €132.0m in cash offsetting this, leading to net debt of about €356.0m.

A Look At Stockmann Oyj Abp's Liabilities

The latest balance sheet data shows that Stockmann Oyj Abp had liabilities of €865.6m due within a year, and liabilities of €477.6m falling due after that. On the other hand, it had cash of €132.0m and €43.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.17b.

The deficiency here weighs heavily on the €91.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Stockmann Oyj Abp would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Stockmann Oyj Abp will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Stockmann Oyj Abp made a loss at the EBIT level, and saw its revenue drop to €844m, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While Stockmann Oyj Abp's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €7.0m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost €56m in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Stockmann Oyj Abp is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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